As tradition dictates, Alcoa (NYSE: AA) kicked off the second-quarter earnings season. On Monday the aluminum giant announced better than expected earnings and provided an upbeat forecast for the rest of 2010. Transport king CSX Corp (NYSE: CSX) echoed Alcoa’s good news, sending equity indexes higher.

That got me to thinking about how composition affects index performance.

Most of the index-tracking exchange-traded funds (ETF) are constructed using the traditional capitalization-weighted methodology all familiar with. The bigger the company, the more weight it carries in the index. But is the traditional way the best way?

One of the great things about ETFs is that they offer managers the flexibility to structure indexes any way they please. And managers take full advantage of this flexibility.

Take the S&P 500; SPDR S&P 500 (NYSE: SPY) is an almost perfect proxy for the index, structured in exactly the same manner as the index it mimics, the best-known ETF’s performance closely tracks the broad benchmark, less the effect of management fees. Oddly enough, there are other ETFs based on the S&P 500 that outperform under certain circumstances.

RevenueShares uses a novel approach to index construction. Although its holdings mirror the components of several common indexes, RevenueShares Large Cap Fund (NYSE: RWL) overweights members with the highest trailing-year revenue and rebalances annually. The fund tends to outperform the straight cap-weighted S&P 500 in periods of economic expansion.

WisdomTree Earnings 500 Fund (NYSE: EPS) weights the benchmark index according to earnings per share (EPS). To be included in the EPS fund a company must have generated positive earnings in the past four quarters, with higher weightings given to companies with higher EPS. It completely excludes companies with negative earnings at any point during the preceding four quarters. It tends to outperform when the economy is strong and earnings are growing, though value investors would do well to stay away.

Finally, Rydex S&P 500 Equal Weight ETF (NYSE: RSP) is almost identical to the S&P 500, but rather than over- or underweighting any holdings all components carry an equal weighting. It’s largely immune to valuation considerations.

In bear markets investors are better off with the S&P 500 itself in the form of SPDR S&P 500. When the index is on the decline, the fund outperforms because of the fact that its heavier weighting to the larger components provides a downside cushion.

Though I wouldn’t say that necessity is the mother of these inventions, they do offer some interesting opportunities in turbulent markets.

What’s New

Last week was a busy one for fund launches, with four new offerings coming to market.

UBS-E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index Fund (NYSE: MLPL), which focuses on midstream master limited partnerships (MLP) that own and operate assets such as pipelines, launched on July 7 with $10.9 million under management. The fund, which includes MLPs such as Enterprise Products Partners LP (NYSE: EPD), Kinder Morgan Energy Partners LP (NYSE: KMP) and Enbridge Energy Partners LP (NYSE: EEP), employs leverage to double the returns of Alerian MLP Index constituents.

I’m inherently averse to the use of leverage–unless you’re a short-term trader it should be avoided. But I don’t have quite so many misgivings about this fund, though it has more to do with the fact that I’m a bit biased toward the MLP sector.

Midstream operators have the benefit of being largely immune to commodity-price swings; they’re paid based on contract rates for the volume of oil and natural gas moving through their pipelines. That makes their revenue streams extremely predictable.

Still, leverage entails risk, and I suggest risk-averse investors go with the unleveraged version of the fund, UBS-E-TRACS Alerian MLP Infrastructure Index Fund (NYSE: MLPI).

For the definitive view on MLPs, check out MLP Profits, a service devoted entirely to the sector. My friends and colleagues Roger Conrad and Elliott Gue have produced outstanding gains from the sector–their performance recently earned the attention of Barron’s.

Two internationally focused funds also launched last week, Emerging Global Shares INDXX India Small Cap Fund (NYSE: SCIN) and Global X Brazil Consumer ETF (NYSE: BRAQ).

I don’t have much of an opinion on India-based small caps, but the Brazilian consumer fund is intriguing.

Brazil is accumulating a lot of wealth as countries such as China purchase huge amounts of its raw materials. And a lot of that inbound cash is finding its way to and feeding the growth of a Brazilian middle class. Huge demand for consumer goods presents a significant long-term opportunity.

Finally, actively managed Mars Hill Global Relative Value ETF (NYSE: GRV) launched July 9 with $31.2 million in assets. While “relative value” is included in the name, a better classification for the fund would be “long-short absolute return.”

Using sector and country index ETFs, the fund maintains an equal number of long and short positions, which are the fund’s bets on the indexes it expects to both underperform and outperform. Expenses are high at 1.49 percent, but Mars Hill Global Relative Value is an interesting option if you’re looking to add an uncorrelated strategy to your portfolio.